Next stock market crash: Why a 65% loss would be historically normal

If you think the last week on the stock market was gross, you see nothing yet.

According to John Hussman, the former finance professor now president of the Hussman Investment Trust.

A known permanent, Hussman has long warned about the dormant risk that threatens to bubble up to the market's surface. And while the shares have not yet received the armed forces, he is expected, his screams are getting stronger, since bearish conditions continue to calcify.

In his latest monthly blog post, Hussman delivered a new spin on his long-standing bearish display. Not only does he expect a market crash in the range of 60-65%, but he also argues that such a meltdown would be completely normal by historical standards.

Allow him to explain.

"It is worth remembering that ̵[ads1]1; apart from the bear market 2000-2002, which ended with valuations still around 25% above historical standards – every other bear market fall in history, including the decline in 2007-2009, has taken reliable valuation measures. to historical norms that currently stand between -60% and -65% below today's market levels, "Hussman said.

He continued: "Given the extremes of current valuation, I continue to believe that a fair, ongoing completion of today's market cycle will result in a loss in the S&P 500 of about two-thirds of the market value."

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Hussman says the other way stocks could Back to historical, normal valuations would be for the S&P 500 to remain unchanged over a long period of time as corporate fundamentals improved.

This scenario requires no negative market events of any kind. And in terms of how much turmoil stocks so over the past week, this seems to be an unlikely, if not impossible, outcome.

"It will take well over two decades, and keep the S & P 500 unchanged, for valuations to reach historic levels on the basis of growth alone," Hussman said.

He continued: "Maintaining that kind of" permanently high plateau "would require the absence of yet another episode of serious risk aversion among investors in that time frame."

Another big red flag noted by Hussman is the nature of the stock market's overvaluation. It is well known at this time that stocks look the most expensive in history with their favored action. This is stated in the table below, which is one of his favorites:

But Hussman is not happy to stop there. He says that "extreme" valuations like those seen today are even more dangerous than another modern occurrence: the tech bubble.

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Hussman Noting that, S & P 500's eye irrigation level was driven almost entirely by tech stocks. Today, however, he finds that every single decile in the reference is "sufficiently overvalued to allow market losses in the range of -59% to -71%, without violating their respective valuation standards."

Put in simpler terms: The whole dang market is historically expensive right now, not just a cross section of overheated stocks.

So there you have it. Hussman strongly refuses to give up his bearish attitude. However, he acknowledges that investor speculation can be an uncontrollable path of the type – which can withstand market signals for unpleasantly long, frustrating bulls like him. That's why he adopts a neutral attitude for the time being.

Hussman's track record

For the uninitiated, Hussman has repeatedly made headlines by anticipating a stock market swing of over 60% and forecasting a whole decade of negative return on equity. And since the stock market has continued to lose most, he continues with his conversations, untouched.

But before rejecting Hussman as a wonky permabear, consider his track record, which he breaks down in his latest blog post. Here are the arguments he puts out:

• Assuming in March 2000 that the technical shares would deep 83%, the technological heavy Nasdaq 100 index lost an "unlikely precise" 83% over a period from 2000 to 2002
• Provided in 2000, the S & P 500 would probably see negative total return over the following decade, as it did
• Assuming in April 2007 that S & P 500 could lose 40%, it lost 55% in the subsequent collapse from 2007 to 2009 [19659026] Finally, the more evidence Hussman unearths around the stock market's unsustainable conditions, the more worried investors should get. Yes, there may still be returns to be realized in this market cycle, but at what point is the risk of a crash becoming unbearable?

  It's a question investors need to answer themselves. And it's a Hussman will obviously continue to explore in the meantime.